TaxTMI 
TaxTMI 
TaxTMI 
2001 (10) TMI 1151
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....s its capital. 3. In respect of the assessment year 1984-85, for the previous year ended 31-3-1984, the assessee filed its return of income on 29-9-1984 declaring "nil" income. The Assessing Officer sought the instructions of the Inspecting Assistant Commissioner (IAC) under the then section 144A as to whether any income or capital gain was assessable in the assessee's hands on the writing up of the value of the land, being the assessee's stock-in-trade and on the introduction of the same, as capital of the assessee in Nirmal Enterprises. By order dated 1-4-1985, the IAC opined that on the basis of the decision of the Supreme Court in the case of CIT v. Hind Construction Ltd. [1972] 83 ITR 211 no income could be said to have arisen to the assessee either when it wrote up the value of the land or when the same was introduced into the firm as its capital. He instructed the Assessing Officer accordingly. He also made a note to the effect that the case had also been discussed with the concerned CIT who was also of the same opinion. 4. On the basis of the IAC's instructions, the Assessing Officer proceeded to complete the assessment. No profit or capital gain was assessed in....
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....re than ₹ 50 lakhs was an attempt to avoid tax through a colourable device nor did he verify whether there was a genuine intention to contribute to the capital of the firm. The CIT further noted from the deed of partnership that though the assessee had contributed stock-in-trade worth more than ₹ 1 crore, the other partners contributed nothing and that they had merely promised that they would bring in money as and when required. Despite this, they have been given 60% share (aggregate). The Assessing Officer, according to the CIT, did not evaluate whether the other partners were really capable of matching the contribution of the assessee. The Assessing Officer had also not gone into the question of genuineness of the firm. Under these circumstances, the CIT set aside the assessment and directed the Assessing Officer "to make a fresh assessment in accordance with law after verification of the facts on the lines indicated above." 6. The assessment was accordingly redone. In the fresh assessment, the Assessing Officer recorded the following findings: (a)Though para (ii) at page 4 of the partnership deed stated that the other partners joined the firm in order to....
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.... in any income. In this view of the matter, he deleted the addition of ₹ 52,92,218 and allowed the appeal filed by the assessee. 8. The Department preferred an appeal to the Tribunal against the aforesaid order of the CIT(A). The assessee had also preferred an appeal against the order of the CIT under section 263. Both the appeals were heard and decided by the Tribunal together. In the Department's appeal, the Tribunal held that from the facts it was apparent that the assessee withdraw substantial amounts of money (from its capital account) after joining the firm, that the real purpose for which the partnership firm was established was neither the smooth running of the project nor the financial requirements as was made out by the assessee, that had the assessee sold the land to outsiders the sale proceeds would have been liable to tax, that the retirement of the assessee from the firm (on 28-2-1989) even before the project was completed revealed the true intention of the assessee, that there was no evidence to show that the other partners were taken into either buttress the purpose of the business or to expedite the project and that under these circumstances the judgment of ....
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....of penalty. The CIT(A) noted that the assessee had furnished all the facts before the Assessing Officer and did not hold back anything. He further noted that in the assessment proceedings the CIT(A) had deleted the addition and though the Tribunal restored it, it showed that there was a bona fide difference of opinion amongst two authorities as to whether the transaction resulted in taxable profits. In such a case, according to the CIT(A), it cannot be said that the assessee was guilty of concealment. The CIT(A) also noticed that the Explanation 1 to section 271(1)(c) has been invoked by the Assessing Officer for the first time in the course of the penalty proceedings without specific mention thereof in the penalty notice. He referred to the judgment of the Hon'ble Bombay High Court in the case of CIT v. P.M. Shah [1993] 203 ITR 7921 and held that the Assessing Officer cannot do so. On the applicability of the said Explanation, the CIT(A) took the view that the assessee's explanation has not been found to be false either by the CIT(A) or the Tribunal in the assessment proceedings and therefore it was not applicable. In this view of the matter, he cancelled the penalty. 12. The Rev....
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.... that in the light of those findings the levy of penalty was fully justified. 13. In support of the contentions, Mrs. Singh, the ld. CIT(DR), drew our attention to the following judgments of the Supreme Court: (i) Mcdowell & Co. Ltd.'s case (supra) (ii) Workmen Associated Rubber Industry Ltd. v. Associated Rubber Industry Ltd. [1986] 157 ITR 77 (SC) 14. On the other hand, Mr. Pardiwalla, the learned counsel for the assessee, pointed out that the plot was the assessee's stock-in-trade and not a capital asset with the result that the judgment of the Supreme Court in the case of Hind Construction Ltd. (supra) was squarely applicable and not the judgment in the case of Sunil Siddharthbai (supra). He submitted that the legal position was thus in favour of the assessee's claim that nothing was taxable as profits of the business in the assessee's hands. With regard to Sunil Siddharthbai ( supra), he contended that in this judgment the ratio was that there is no "transfer" of a capital asset for purposes of capital gains when a partner brings in his personal asset into the partnership as his capital and the present case falls squarely within this ratio and it was only the o....
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.... main provisions of section 271(1)(c) or even under the Explanation 1 thereto. 15. Mr. Pardiwalla proceeded further to point out that the orders of the Tribunal in the assessment proceedings are pending in reference before the Hon'ble High Court under section 256(2). According to him, the effect of the orders of the High Court calling for a reference of a question of law is that the High Court prima facie feels that the order of the Tribunal may be erroneous and since in the present case questions of law have been called for there is a possibility that the decision of the Tribunal would be reversed, which possibility takes the case out of the purview of section 271(1)(c). In support of this contention, he relied on the order of the Special Bench of the Tribunal in the case of Samir Diamonds Exports (P.) Ltd. v. ITO [1988] 25 ITD 73 (Bom.) at 81. 16. In support of his contentions, Mr. Pardiwalla relied on the following orders/judgments: 1.Yasmin Properties (P.) Ltd. v. CIT [1993] 46 ITD 331 (Bom.) alias para 14 2.ITO v. R.B.G.M. Modi & Bros. (P.) Ltd. [1989] 28 ITD 349 (Delhi) 3.V. Ramachandra Rao v. ITO [1990] 33 ITD 650 (Hyd.) 4.Maharaj Prithviraj v. Dy. CIT [1993] 45 TT....
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....st not be judged solely with reference to the same. As regards the contention vis-a-vis the effect of the High Court's orders under section 256(2) calling for reference, Mrs. Singh submitted that the only effect is that a question of law arose from the orders of the Tribunal and that it would be too much to say that the mere possibility of the Tribunal's orders being overturned took the case out of the purview of section 271(1)(c). Finally, as to the cases cited by Mr. Pardiwalla, she contended that the facts of each case may be different and the question as to whether the assessee is guilty of concealment of income has to be answered with reference to the facts of the particular case and mere reliance on decided cases is not justified. She also pointed out that the facts in the cases cited by Mr. Pardiwalla are different from the present case. 18. We have carefully considered the facts and the rival contentions, ably put forth before us by both sides. We are satisfied that the penalty was rightly imposed and that the CIT(A) was not justified in cancelling the same. In the proceedings under section 144A, what was referred for the decision of the IAC was only a question of law, viz....
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.... or even the Assessing Officer in the course of the original assessment proceedings to this crucial fact. The mere filing of the capital account, considering the magnitude of the case and the importance of the legal questions, does not, in our opinion, suffice. The assessee, in our opinion, ought to have drawn the pointed attention of the Income-tax authorities to the same. This it has failed to do. This fact came to light when the assessment was set aside under section 263 for being redone after proper investigations in the light of certain observations in the judgment of the Supreme Court in Sunil Siddharthbai's case (supra). The impression gained by us is that the attempt of the assessee was to pass off the facts of its case as being similar to the facts in the case of Hind Construction Ltd. (supra) and gain an undue tax advantage by not bringing to the notice of the departmental authorities the vital distinction, viz., that the assessee not only wrote up the value of the asset and brought the same into Nirmal Enterprises as its capital at the enhanced value but also withdrew monies almost equal to the value of the asset within a short span of time. 19. In this context, the que....
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....d and not contumacious. If the material fact, viz., the receipt of monies from the capital account, had been specifically mentioned to the authorities, as we have already observed, the position of the assessee possibly would have been stronger. There is, in our view, a big difference between cases where all vital or material facts are disclosed and a principled or legal stand is taken, say, that a particular receipt is not taxable, and cases where vital or material facts are withheld or slipped in, in an inconspicuous manner, as in the present case where the assessee claims to have filed the copy of its capital account with Nirmal Enterprises and a claim is made that a particular sum or receipt is not taxable. The former category of cases fall within the ratio of the judgment of the Calcutta High Court in Burmah Shell Oil Storage & Distribution Co. Ltd.'s case (supra) cited by Mr. Pardiwalla, but the latter category does not. The whole question is about the conduct of the assessee, the manner in which he has made the disclosure. The disclosure should have been of material facts and it must be in a fair and open manner that would give the opponent - In this case the departmental aut....
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....tion that certain material facts could have been gathered if only a diligent examination of the record had been undertaken. Penal consequences will follow if half baked or incomplete facts are furnished, where what is withheld is material. We are unable to hold that the assessee furnished complete facts relating to the introduction of the land as its capital into Nirmal Enterprises; only part-disclosure was made, the vital or material fact of having received monies almost equal to the value of the plot of land, introduced as its capital in Nirmal Enterprises, having been really withheld without apparently seeming to do so. We are able to glean a design from the assessee's conduct a design to lead the Income-tax Authorities upto the garden path. In this connection, we wish to lay emphasis on the fact that even where an opportunity was afforded to the assessee in proceedings under section 144A the fact was not disclosed and an attempt was made to show that the case was covered by the ratio of Hind Construction Ltd. (supra). There was not even an attempt to say that though the assessee received monies from the firm, still the case would be covered by Hind Construction for whatever rea....
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....s asked to believe that when the assessee introduced the land as its capital contribution at the written-up value of ₹ 1,04,53,500 nobody thought of the capital being proportionate to the profit-sharing ratios of the partners but within about 6 months thereof this aspect was seriously considered and the assessee was asked to withdraw the monies so that the capital of the partners would be in the ratio in which they shared profits. It is pertinent to note that in the meantime the firm of Nirmal Enterprises had admittedly received "advances from the buyers of the units in the firm" (see page 9 of the reply to penalty notice at page 46 of the paperbook) and was thus in possession of monies. The Tribunal, in its order, has, if we may say so with respect, pertinently observed towards the end of paragraph 8 that if the assessee had disposed of the stock-in-trade at the market value to the outsiders it would have been exigible to tax on the business profits. The scheme of things sought to be put into effect by the assessee is that it would write up the value of the land and introduce it into Nirmal Enterprises as its capital contribution at the written-up value, that the f....
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....e assessee has chosen to retire from the firm, though the project was unfinished. The reason for the retirement are not far to seek. The assessee's presence in Nirmal Enterprises was required or relevant only for the period during which it was to be paid the price for the stock-in-trade it brought into the firm as its capital. Thereafter there was no point in continuing as partner. Thus, so far as the assessee is concerned, it had no further use for the firm once the monies for the stock-in-trade had been received. Hence the retirement. 24. The next argument of Mr. Pardiwalla was that since the Hon'ble High Court had ordered a reference of the question of law under section 256(2) from the order of the Tribunal in the assessee's appeal against the order under section 263 and in the Department's appeal against the cancellation of the addition by the CIT(A), there is a possibility of the Tribunal's orders being reversed and that the granting of reference prima facie means that the view taken by the Tribunal may be considered erroneous. He contended that in both cases, no penalty could be levied. We have given anxious consideration to the argument. We have also perused the order of th....
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....esh assessment order passed by the Assessing Officer at the last paragraph of page 3 (page 24 of the paper-book) and the first two paragraphs of page 5 (page 25 of the paper-book). We do not wish to speculate as to who is responsible for this grave faux pas. With a crucial fact forming the bedrock of the revised assessment order being completely missed, and an observation made contrary to the record in, with respect, a cavalier fashion, it beats us as to how the order of the CIT(A) can be considered as an "opinion". So much for the benefit of a difference of opinion. 26. Mr. Pardiwalla, with his usual thoroughness, cited a number of authorities which we have already referred to. We have gone through them but find that each one of them has been rendered on the peculiar facts of the case and those facts are quite distinct from the facts of the case before us. But the order of the Tribunal in the case of Yasmin Properties (P.) Ltd. (supra) needs mention as Mr. Pardiwalla relied upon it to contend that even where the principle laid down in McDowell & Co. Ltd. (supra) applies if all the facts are disclosed by the assessee then notwithstanding that the amount is taxable there ....
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.... High Court in the case of P.M. Shah (supra). In the light of the recent decision of the Supreme Court in K.P. Madhusudhanan v. CIT [2001] 251 ITR 99 1, this position no longer obtains. In fact Mr. Pardiwalla with his usual fairness stated that the judgment of the Supreme Court is against him on this point but contended that on merits Explanation 1 did not apply because the assessee had disclosed all facts material to the computation of its income and also acted bona fide. He also contended that the assessee did not submit any explanation which it could not substantiate and that its Explanation has not been found to be false, though it may not have been convincing, which is a different matter. He therefore, pleaded that the assessee fell within the exception provided in the said Explanation and hence no penalty is leviable. 30. This aspect of the matter has already been considered by us at some length. To briefly recapitulate at the cost of repetition, the fact that the assesee was in receipt of substantial amounts from Nirmal Enterprises through its capital account and that such receipts almost equalled the written-up value of the plot of land introduced as its capital in Nirmal ....